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Rating Action:

Moody's places Vodafone's A3 ratings on review for downgrade

26 Jun 2013

Madrid, June 26, 2013 -- Moody's Investors Service has today placed on review for downgrade the A3 senior unsecured and issuer ratings and (P)Baa2 preferred stock shelf ratings of Vodafone Group Plc (Vodafone) and related rated entities. Concurrently, Moody's has affirmed Vodafone's Prime-2 short-term rating.

The rating action follows the announcement that Vodafone intends to acquire Kabel Deutschland Holding AG ("KDH", Ba2 under review direction uncertain) in a transaction that values KDH at a total enterprise value (EV) of EUR10.7 billion (GBP9.1 billion). The transaction is subject to clearance from the European Commission and is expected to close in Q4 2013.

RATINGS RATIONALE

"Placing Vodafone on review for downgrade reflects our view that the potential benefits of acquiring KDH could be outweighed by the heightened financial risk implied by the increased debt burden," says Iván Palacios, a Moody's Vice President -- Senior Credit Officer and lead analyst for Vodafone. "This is a large transaction for Vodafone, which the company will fund primarily with existing cash resources and debt, resulting in a deterioration in its credit metrics."

Moody's estimates that pro forma for the acquisition, Vodafone's adjusted debt/EBITDA will increase by 0.6x, resulting in Vodafone's leverage exceeding the 3.25x level that Moody's had indicated for downward pressure on the A3 rating. The rating agency expects the group's retained cash flow (RCF)/adjusted net debt ratio to remain below 30%.

In Moody's view, the transaction is fully priced with an EV/EBITDA multiple of 12.4x, higher than the 9x multiple at which the European cable sector is currently trading. While the combination of Vodafone and KDH should lead to substantial synergies, both in terms of costs and capex and in terms of revenues, there is nevertheless a degree of execution risk in delivering these synergies.

In addition, this acquisition demonstrates the strategic importance of fixed-line asset ownership for Vodafone, which could increase event risk should the group intend to complete similar deals in other European countries where it lacks a relevant fixed-line exposure.

Moody's notes that mitigating these negative considerations is the fact that the acquisition of KDH will improve Vodafone's business profile in Germany, its largest and most important European market. Since Vodafone is facing a number of challenges as a result of its mobile-centric business model, integrating its mobile business with a cable provider allows it to better compete with the incumbent through a competitive convergent offering. In addition, Vodafone will reduce its dependence on the network of Deutsche Telekom AG (Baa1 stable), and leverage KDH infrastructure for mobile backhaul.

Moody's recognises that Vodafone has a strong liquidity profile, which enables the group to fund the deal with existing cash resources and available credit facilities, without the need to access the capital markets over the next 12 months.

Vodafone's A3 rating reflects its large size and scale, the diversification benefits associated with its strong positions in many different markets and the financial flexibility it derives from its 45% equity stake in Verizon Wireless (A2 stable). In addition, the rating takes into account management's approach of balancing shareholder remuneration with bondholder protection. However, the rating also factors in the negative trends experienced in Vodafone's core western European markets, including heightened competition, slowing growth, regulatory pressures and macroeconomic weakness. Furthermore, the rating reflects the structural challenges that Vodafone faces in light of its mobile-centric business model and position as challenger in most of the markets in which it operates.

RATIONALE FOR REVIEW FOR DOWNGRADE

Moody's review will balance the strategic benefits to Vodafone from acquiring KDH, with the financial risks implied by such an investment. The review will focus on (1) the potential measures that Vodafone may take to offset the impact on its financial profile of this acquisition; and (2) the potential for further similar acquisitions in other European markets. Moody's notes that if the transaction is completed as planned, Vodafone's rating could be downgraded by up to one notch.

WHAT COULD CHANGE THE RATING UP/DOWN

Prior to the review process, Moody's said that the rating could come under downward pressure if Vodafone's financial profile weakens owing to a deterioration in the group's operating performance or large debt-financed acquisitions. Such a deterioration would be reflected by the company's adjusted RCF/net debt ratio remaining below 30% and its adjusted debt/EBITDA ratio above 3.25x for a sustained period of time.

Conversely, upward pressure could be exerted on the rating if Vodafone's credit metrics were to strengthen on a sustainable basis, with an RCF/net adjusted debt ratio comfortably in excess of 35% and an adjusted debt/EBITDA ratio decreasing below 2.0x, along with demonstrated strong free cash flow generation. However, in view of Vodafone's current financial policy, such an upgrade appears unlikely.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Vodafone Group Plc is one of the world's largest operators of mobile telecommunications networks. The group operates in more than 30 countries and has partner market arrangements in over 50 more. For the financial year ended March 2013, Vodafone had more than 404 million customers worldwide (on a proportionate basis) and reported revenues of GBP44.4 billion and EBITDA of GBP13.3 billion.

LIST OF AFFECTED RATINGS

The list of affected ratings is as follows:

Vodafone Group plc

- Senior Unsecured ratings of A3: on review for possible downgrade

- Senior Unsecured MTN ratings of (P)A3: on review for possible downgrade

- Senior Unsecured Shelf ratings of (P)A3: on review for possible downgrade

- Preference Shelf ratings of (P)Baa2: on review for possible downgrade

- Commercial Paper ratings of P-2: affirmed

Vodafone Americas Inc

- Pref. Stock ratings of Baa2: on review for possible downgrade

- Senior Unsecured Shelf ratings of (P)A3: on review for possible downgrade

ATI Financing I

- BACKED Pref. Shelf ratings of (P)Baa2: on review for possible downgrade

ATI Financing II

- BACKED Pref. Shelf ratings of (P)Baa2: on review for possible downgrade

Vodafone Holding GmbH

- Long-Term Issuer Rating of A3: on review for possible downgrade

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ivan Palacios
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places Vodafone's A3 ratings on review for downgrade
No Related Data.
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